There were over 430,000 new business applications in January 2022. If you own a new business, you need to consider incorporating your business, as it can provide you with tax benefits.
Two of the most common options for incorporation are an S corp and a C corp. You need to know the difference between an S corporation vs C corporation to choose the best option for founding a legal entity.
This guide to the types of business entities will tell you everything. Read on to learn all you need to know about S and C corps.
What Is a C Corp?
A C corp is the default tax class that the IRS gives new corporations. There are no special privileges provided to a C corp.
You also don’t need to do anything special to become one. By creating your articles of incorporation, you inherently make a C corp.
C corp status tends to work better for large corporations with many shareholders. However, they’re taxed more heavily than S corps are.
What Is an S Corp?
The S in “S corporation” stands for “special”. Interestingly enough, that’s how the IRS views them.
S Corps are in a tax filing class of their own. They receive tax benefits. The biggest of these is not having to pay corporate income tax.
There are additional requirements to become an S corp. In addition to incorporating as a C corp, you need to meet eligibility criteria and file to change to an S corporation with the IRS.
S Corporation vs C Corporation: Similarities
Both forms of incorporation provide their owners with limited liability. The corporation’s assets are separate from its owner’s personal property. Both require you to file articles of incorporation with the IRS.
They also both have a similar corporate structure. The corporate makeup of both includes shareholders and a board of directors. From there, the two classes of corporations start to differ.
S Corporation vs C Corporation: Differences
The main difference between S corps and C corps is that S corps don’t have to pay corporate income tax. Individual owners pay tax, not the corporation. The IRS does, however, put strict shareholder criteria on S corps.
S corps can have no more than 100 shareholders. There are no limits for C corps. As a result, this designation is better for large businesses.
S corps can only have one type of stock. There are more options for C corps.
Choose Your Best Corporate Class
Becoming a corporation is a big step for your business. You need to know the difference between an S corporation vs C corporation. Only then can you make your ideal business entity.
Use the information in this guide to choose your ideal corporate class. That way, you can make the most of tax benefits and reap huge rewards.
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